Bookkeeping Solutions Basics for Small Businesses
Introduction
Let’s be honest: none of us started a business to do bookkeeping, but without it, most businesses don’t last very long.
Let’s go over the bookkeeping basics for small businesses:
- What is bookkeeping?
- Why is it important?
- How to do it?
What are Bookkeeping Solutions and Why is it Important?
Definition of Bookkeeping
The textbook definition:
“Bookkeeping is the systematic, routine method of retrieving financial information, categorizing that information, and putting it into an accounting system to generate reports used by decision-makers.”
A simplified definition:
“Bookkeeping is the recording of past financial data so that you can make future business decisions.”
The 6-Step Bookkeeping Solutions
Step 1: Gather Source Documents
Source documents are the original records for a transaction, like invoices, sales orders, or receipts.
Documents usually contain:
- Date
- Buyer and seller
- Amount
- Product or service provided
Most people don’t keep physical copies of these documents. Instead, they rely on bank statements for the details.
However, cash transactions must be documented separately because they don’t appear on bank statements.
Tip:
Using debit or credit cards for payments makes it easier to classify transactions later.
Step 2: Categorize Your Transactions
Classify transactions into specific categories such as:
- Assets
- Liabilities
- Equity
- Revenue
- Expenses
Subcategories can also be used. For example, inventory can be listed under assets.
Example:
- Cash is an asset.
- Future obligations like payroll or loans are liabilities.
- Equity increases with revenue and contributions, and decreases with distributions and expenses.
A company like Goldmine Taxes can help organize and categorize transactions.
Step 3: Reconcile Your Transactions
Reconciliation means matching your bank statements with your accounting records.
It ensures that every transaction is accounted for.
It’s easy to double-count or miss a transaction, and reconciling catches these errors.
Start with the beginning balance, match it to your records, and go through each transaction line by line.
Step 4: Prepare Financial Statements
After categorizing and reconciling, you can prepare key financial statements:
- Balance Sheet: Shows assets, liabilities, and equity.
- Income Statement: Displays revenue and expenses, showing how profitable your business is.
- Cash Flow Statement: Tracks cash inflows and outflows from operations, financing, and investing activities.
Step 5: Read and Analyze Financial Statements
Understanding your financial statements is critical to improving profitability.
Balance Sheet:
- Assets are listed first, followed by liabilities and equity.
- The balance sheet must balance (Assets = Liabilities + Equity).
- Cash is the first item under assets due to liquidity.
Other current assets follow, like accounts receivable and inventory.
Long-term assets like equipment are listed next, with depreciation reducing their value.
Liabilities:
Listed similarly to assets, starting with current liabilities like accounts payable and wages payable.
Long-term liabilities, such as loans, are listed after.
Equity:
Represents ownership in the business. It’s also known as book value or net worth.
Retained earnings reflect profits reinvested in the business.
Income Statement:
- Revenue (top line) shows income from sales.
- Cost of goods sold (COGS) represents direct costs to generate revenue.
- The bottom line is net income, which is the profit or loss after all expenses.
Cash Flow Statement:
- Cash flow from operations involves the daily activities of the business, like sales.
- Cash flow from financing relates to loans and raising capital.
- Cash flow from investing includes gains or losses from investments.
Step 6: Make Decisions Based on Data
Use your financial statements to make better, more profitable decisions:
- Balance Sheet: Evaluate liquidity and sustainability.
- Income Statement: Assess operating performance.
- Cash Flow Statement: Manage cash inflows and outflows effectively.
For example, if your balance sheet shows high accounts receivable, you might shorten the collection period to have more cash on hand.
If operating cash flow decreases, consider reassessing operating expenses or pricing.
Conclusion
Bookkeeping Solutions can be the difference between a profitable year and a difficult one.
With accurate data, you can make smarter, more informed business decisions.
